Retail Rap: Office Surprise
I have to admit, the recent announcement of the merger between Office Depot and OfficeMax took me by surprise. It’s not as though it doesn’t make sense — it’s logical both logistically and financially — but, while there had been a few rumblings and rumors, this is a dramatic move that took place with relatively little forewarning.
It forces us to ask some basic questions: What does a merger mean for Office Depot and OfficeMax? What does it mean for the office supply category in general? And what does this move say about big box retail and retail real estate going forward?
First, the good news: with both brands struggling for some time now, a consolidation not only makes sense, it may be the best and only way forward. Decision-makers at both retailers concluded (correctly, from my perspective) that they had two problems: 1) too many stores, and 2) store format problems — most of both chains’ stores are simply too large. Clearly they felt that this move gives them the best shot to address both of those core issues.
However, the bad news is that a number of significant challenges remain. Despite the similarity in brand name and format, a merger of this size poses a number of thorny questions. While some shouldn’t be too hard to resolve, such as naming the newly consolidated brand, and passing government anti-trust scrutiny, other issues will not likely be so straightforward.
One of the toughest questions to answer is which stores should be closed. With both brands overextended, a dramatic portfolio trimming is in order. OfficeMax has about 850 U.S. stores currently, and Office Depot maintains about 1,100 stores. Both brands have made modest cuts in recent years, but much more is obviously on tap post-merger. The size of the rollback is up for debate, however. Depending on which analysts and industry observers you talk to, the number of Office Depot and OfficeMax stores that will be closed in the coming years ranges from around 200 closings (or approximately 10% of their combined portfolio) up to 1,000 (which would represent a much more dramatic 50% closure rate). My suspicion is that it is probably the latter, which is one of the reasons that I think rough seas are ahead for this newly unified office supply giant.
The really interesting question, of course, is how to decide which places to close. With both chains launching smaller store concepts and layouts in recent months, size is a major consideration. OfficeMax has had several prototype sizes over the years; after starting out big, the brand has shrunk its standard footprint for many stores. Office Depot has a smaller average store size, but many larger locations are still under lease.
Size isn’t the only thing that matters: Locations that are in close proximity or direct competition with one another will also be obvious targets for closure. Retail context is also a big factor: if a larger store is in a much better performing center, for example, it may make sense to keep that location and perhaps consider downsizing it or reworking the layout. In addition to size, layout and strength of co-tenancy, other economic factors will likely play a role: everything from overall local market strength to the terms and expiration dates of existing leases will factor in.
The fundamental question is this: In a market niche where Staples is the market share leader (and is already farther along the path to reinventing itself with smaller “right sized” store formats), will the cost savings and competitive and operational synergies that result from this merger be enough to keep this new office supply brand competitive? The biggest sticking point as I see it is that neither chain has the optimal concept. It’s not just a matter of sorting through their new combined portfolio and picking out the deadwood. That would be the case if we were discussing a healthy chain and healthy format — but these are neither. This is more than just a large national merger between two prominent brands and a challenging logistical transition; there is a reinvention taking place at the same time. And that is a tough row to hoe.
How do you see the long-term prospects for the merged company? What impact will it have on the office supply segment? On the broader retail real estate market? Comment below to join the conversation, or email me directly at [email protected].
Click here for past columns by Jeff Green.
Earnings flying high at American Eagle
PITTSBURGH —American Eagle Outfitters reported adjusted fiscal year 2012 earnings for the 53 weeks ended February 2, 2013 of $1.39 per share, a 43% increase from fiscal year 2011 adjusted earnings of 97 cents per share for the 52 weeks ended January 28, 2012.
Robert Hanson, chief executive officer stated, “I’m extremely pleased with our progress in 2012 as the team delivered on our near-term priorities and exceeded our targeted financial metrics. In a competitive and volatile consumer environment, we drove a strong top line on leaner inventories, reduced markdowns and achieved cost leverage. We remain focused on our strategic plan aimed at fortifying our brands and processes and growing our business across North America. Concurrently, we are laying the ground work for transformational global expansion, while continuing to drive strong returns to our shareholders.”
For the fourth quarter the company reported adjusted earnings of 55 cents per share, a 41% increase compared with adjusted EPS of 39 cents for the same period last year.
Total net revenue for the 53 weeks increased 11% to a record $3.48 billion from $3.12 billion for the 52 week period last year. Consolidated comparable sales for the 53 weeks increased 9% over the comparable 53 week period last year. This follows a 4% increase last year.
Total net revenue for the 14 weeks increased 9% to a record $1.12 billion from $1.03 billion for the 13 week period last year. Consolidated comparable sales for the 14 weeks increased 4% over the comparable 14 week period last year. This follows an 11% increase last year.
TrueCount offers RFID solutions for small, mid-sized retailers
DOVER, N.H. — Zander Livingston, CEO of Truecount Corp, an RFID software provider, announced that Truecount isintroducing a new Software as a Service (SaaS) pricing and deployment model that places inventoryvisibility and all other RFID benefits within the reach of any size retailer.
Truecount’s SaaS offering combines modest set-up costs with a low monthly fee, substantiallyreducing the upfront investment traditionally associated with RFID implementations. With hardwarecosts and licensing fees a constraint for some retailers, the SaaS option provides affordability andflexibility for companies who are considering a RFID pilot or network wide roll-out.
According to Livingston, Truecount’s SaaS model enables small and mid-sized firms to enjoy thesame advantages of item level RFID as the retail “giants” without significant investment. “Retailerswho utilize Item-level RFID technology in their stores and in their supply chain gain many efficienciesbased on faster inventory counts and greater inventory accuracy. This gives these retailers a definitecompetitive edge in their marketplace,” says Livingston. “We are leveling the playing field. Now,mid-sized and smaller firms can accelerate their implementation of RFID and begin accruing the samemarket advantages as the biggest retail brands.”